Present a report which outlines and evaluates the main contributions Friedrich Von Hayek (1889-1992) made to our understanding of macro economics.

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Macro Economics II Assignment

Submitted to: John O Callaghan

Submitted by: Ruth Lennon

Student No.: 1061022

Present a report which outlines and evaluates the main contributions Friedrich Von Hayek (1889-1992) made to our understanding of macro economics.

The Austrian born economist Friedrich Von Hayek presented some of the most influential theories on markets in the 20th century.  As a defender of the free market and of classical liberal principles he believed that we must move away from a state-controlled or “planned” economy and towards a society based upon freedom of association and exchange according to the rule of law.  He is credited as being the “most prodigious classical liberal scholar of this century” and has been described as the central pioneering figure in changing the course of economic thought in the twentieth century.”  (Thomas Sowell, 1995).  

Hayek was born in 1899 in Vienna into a family of intellectuals. After serving in the army of World War I, he studied and received doctorates in law, psychology and economics from the University of Vienna (1921-1923).  It was at this time that the theories of the Austrian School of Economics were being formulated and refined by Eugen Boehm, Friedrich Wieser and Ludwig von Mises, all of whom were second generation Austrian Economists.  The Austrian economists believed that their view could be distinguished to that of the neo-classicalists by 5 major points; radical subjectivism, methodological individualism, purposivness in human action, casual-geneticism and methodological essentialism.  While studying in Vienna, Hayek view on socialism changed radically as a result of his exposure to the works of Ludwig von Mises.  Initially sympathetic to socialism, his economic thinking was transformed during his student years.  Mises was to become not only an intellectual companion to Hayek but also a major influence in his work.  Some say that Hayek’s work can be thought of as “an attempt to make explicit what Mises left implicit, to refine what Mises had outlined, and to answer questions Mises had left unanswered.”  Hayek himself stated of Mises that; “there is no single man to whom I owe more intellectually.”  From 1922 to 1927 Hayek worked under Mises in a government office.  In 1927 he became the Director of the Institute for Business Cycle research which he and Mises had set up together.  It was during this time that Hayek made some of his first important contributions to our understanding of macroeconomics.  

Hayek started his work in refining the technical understanding of capital coordination and the institutional details of credit policy which Mises had began in his book “The Theory of Money and Credit”.  Hayek’s first book “Monetary Theory and the Trade Cycle” (1920) analysed the effects of credit expansion on the capital structure of an economy.  The Mises-Hayek theory of the trade cycle explained the “clusters of errors” that characterises the cycles.  “Credit expansion, made possible by the artificial lowering of interest rates, misleads businessmen; they are led to engage in ventures that would not otherwise have appeared profitable.  The false signal generated by the credit expansion leads to mal-coordination of the production and consumption plans of economic actors.  This mal-coordination first manifests itself in a ‘boom’ and then, later, in the ‘bust’ as the time pattern of production adjusts to the real pattern of savings and consumption in the economy.”  Soon after publication of the book Hayek was called to give lectures in the London school of Economics.  His lectures there were published in a second book “Prices and Production” (1931) which was cited by the Nobel Prize Committee in 1974.  His lectures in the London School of economics were received with such acclaim that he was called back to the prestigious University and appointed Tooke Professor of Economic Sciences and Statistics.  He was to serve as that institutions answer to Cambridge’s John Maynard Keynes.  Hayek was only 32 at the time and had already reached what many believed to be the pinnacle of the economic profession.

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At the time in England, Keynes was credited by the academic community as the author of many serious books on economics.  His essay “the end of Laissez-Faire”, (1926), presented his argument for active government intervention in economic affairs.  Keynes was heralded as the “saviour of capitalism” amongst his colleagues rather than being recognised as the advocate of inflation that he was.  Hayek disagreed immensely with the theories that Keynes held and the Hayek-Keynes debate became the most fundamental debate in monetary economics in the 20th century.  Hayek felt that the problem with Keynes economics was his failure to understand the role ...

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